Where Social Entrepreneurship and Venture Capital Meet

As far as I see it, subscription e-commerce is most effective for those purchases that occur 1) on a pretty regular and predictable basis and/or 2) in markets of great diversity or opacity. Regarding 1): it doesn’t make sense to receive a box of [insert goods here] every single month on an ongoing basis if you’re not going to use the product regularly. Regarding 2): receiving a curated selection of goods when there there is overwhelming depth and breadth of choices (and high barriers to understanding) makes a whole lot of sense.

From where I’m sitting, FirstCrush (launched just last week by my friend Melody) seems to fit the profile of successful subscription e-commerce perfectly. They focus on helping you find bottles of wine you’ll enjoy and delivering them to your doorstep once a month! For many folks, a couple bottles of wine every month (whether for personal consumption or for bringing along to parties to share) follows a pretty regular purchase cycle. Furthermore, because the incredible variety of potential purchase options out there and the barriers to understanding what is what, a curated selection of wines seems to be a pretty great idea that can help people figure out what they enjoy and reduce wasted time and money.

If you live in New York City, you have a few ways of getting to the airport. On the public transportation side, you you can take the E train and AirTrain (1 hour from my apartment) to JFK, or the 2/3 trains and the M60 bus (55 minutes) to LaGuardia. On the private side, you have buses to Newark as well as cabs and black cars that will take you to JFK in 40 minutes or LaGuardia in 25 minutes (from my apartment). With the speedier rides, though, you also have increased costs to the tune of a 10x difference (~$5 vs. ~$50).

What if there were a way to get cab / black car speed and reliability at a cost much closer to that of public transportation, though? That’s what my friend Winston is doing with Shairporter, a ride-sharing service for cabs and limos, focusing on trips to and from airports in the NYC area. I can’t disclose too much beyond that right now, but stay tuned for the big launch in a few months! You can sign up for the private invite list here.

Looking for something fun to do tonight while supporting a great cause? Come join me at The Adventure Project’s Spring Gala tonight at the penthouse of the Ganseevort Park Hotel! Tickets are available here. TAP is a non-profit focused on increasing “investments in positive social enterprises around the world,” so if you’re reading this blog, this event is likely right up your alley!

Earlier this morning, Mayor Bloomberg just announced the launch of Citi Bike, New York City’s new bike share program that will begin this summer! The program will deploy 10,000 bikes across Manhattan and Brooklyn starting in July and will be managed by Alta Bicycle Share. The New York City Investment Fund is supporting this initiative with an investment, as well, alongside sponsors Citi and MasterCard. Citi Bike will be the country’s largest public bike share program.

Yesterday, the New York City Investment Fund launched its 2012 FinTech Innovation Lab with its partner Accenture. The companies are all moved in to the Lab’s incubator space now, and Deputy Mayor Bob Steel welcomed the six companies last night at an opening dinner.

Unfortunately, all of the work for me in managing the program’s day-to-day logistics has only just begun. The next twelve weeks will include a Leadership Program with various panels and dinners, face-to-face meetings with VCs and bank CTOs, as well as newly-launched office hours with our all-star group of Entrepreneurs Network mentors. Lots to do, so apologies in advance if the rate of blogging decreases somewhat.

In any case, we have six amazing companies selected for the program this summer, and while I unfortunately can’t tell you their names just yet, keep your eyes peeled! The Investor Day / Demo Day, which will conclude this year’s FinTech Innovation Lab, will take place on July 18th, so stay tuned for the big reveal.

Many of you have probably heard of the JOBS Act of 2012 or about “crowdfunding legislation” that was in the works for awhile now and was just signed into law earlier this month. One of the main provisions of the bill is the “crowdfunding” provision, which essentially enables regular Joes to invest in private companies, not just “accredited investors,” which are investment entities or people with a high net worth or level of income. Fred Wilson, who wrote a great blog post on the subject, explains the thinking behind this provision:

“I am a huge fan of allowing every person, not the just super wealthy and institutions, to participate in the funding of startups. Frankly its a shame that the average Facebook user has not been able to own shares in Facebook during its increase in value from zero to $100bn. The same kind of thing can be said about Twitter and many other of our portfolio companies. The changes to securities regulations in the JOBS bill are fundamental and important and very much needed.“

So if the “accredited investor” requirement was so unfair, why was it even implemented in the first place? The general idea was to protect the public (who aren’t necessarily sophisticated investors) from being taken advantage of. As it currently stands, though, the JOBS Act has incorporated protections “to help insure that equity crowdfunding of startups doesn’t become a fraud infested sector of the capital markets.”

Now, “regular folks” like you and me can invest in startups, even if we don’t make $200,000+ a year or have over 1 million dollars in assets. Traditionally, startup investors would have to fill out an “Accredited Investor Questionnaire” like the one below, which is an excerpt of the type that my fund fills out for investments I work on. Scroll down to bullets (e) and (f) to see what the restrictions were like for individual investors. Scary, right? Aren’t you glad that the JOBS Act was passed?

The IRR, or “internal rate of return,” is the rate of return / discount rate that makes the NPV of a stream of cash flows equal to zero. You can read in more detail here. In the case of Instagram’s Series B financing from last week, the cash flows would be a $50,000,000 cash outflow (invested amount) and a $100,000,000 inflow (sale proceeds) from the Series B investors’ perspective. Now, a 50% IRR is pretty good. A 100% IRR is fantastic. How does ~500 quadrillion % sound? (That would be 500 plus another 15 zeros). Well, that’s the IRR that the Series B investors received on their investment, assuming April 5th as the day they wired their money to Instagram and April 12th as the day they get their cash back.

But does a 497,237,713,464,852,000% IRR (to be exact) make any sense at ALL? Yesterday, I was chatting with Edlyn Yuen, an associate at StarVest Partners, and she got the same absurd-sounding number in Excel, too. Hmm. Let’s dig in a little deeper then… As you can tell below, the IRR decreases exponentially as time passes (the graph below in blue looks almost meaningless given the extreme drop). What was a 500 quadrillion % IRR (over a one week span) decreases to a measly 450,000% IRR once you get to a 1 month investment horizon.

By the time your length of investment increases to 3 months, you’re down to a “tiny” 1,500% IRR.

If we then zoom in a little closer and graph the expected IRR assuming a length of investment ranging from 3 months to 1 year, the graph below is what you get. As you can see, the IRR approaches 100% and hits 100% exactly on the 1-year anniversary. That much makes sense to me at the very least — on an annual basis, a 100% return equals a doubling of value (e.g., $50mm to $100mm).

So as you can see, while the 500 quadrillion % IRR seems completely absurd, once you examine how an IRR is calculated, it begins to makes sense, at least mathematically. Practically speaking, though, a quadrillion % still doesn’t make much sense in my head, much less 500. In any case, congrats to the Instagram team, as well as Sequoia, Thrive, Greylock, and Benchmark on a great exit!